PSG Stakeholder Capitalism: The Real Existentially Transformative Economic Paradigm.

 

Brief Prefatory Comment: This discussion of stakeholder capitalism asserts that there is a specific set of characteristics that a “stakeholder capitalism” model must have to persuasively replace shareholder capitalism as the dominant model for free enterprise economies. Specifically, it is necessary to explain what the best model is, why it is best and how it must be designed and function to make it the ultimately best free market capitalism paradigm. That case is made here.

Making the Case.

This article explains why stakeholder capitalism, correctly defined, is the best way to create long term value and wealth for corporations, economies and societies – local and global. Stakeholder Capitalism, as presented here, applies to all organizations, including, even if only indirectly, nations and their governance systems (representative democracy in the United States for example), economic systems - all organizations.

All readers, after reading and concurring, are invited to respond and to join in taking the next steps to make this 21^st century ultimately correct stakeholder capitalism model dominant, so that long term value and wealth creation for all organizations, economies and societies is the outcome, locally and globally!

Professor Adam Smith and His “Stakeholder Capitalism” Axiom.

Professor Adam Smith, through his two famous books in the last half of the 1700s, presented an axiom that can – and should - guide societies through their economic and political systems.

 Many – even most – students of Smith contend that his focus and thesis was on self-interest only. Most Smith researchers over the last 250 years have not discussed, and possibly have not understood, that he really connected self-interest, that of the butcher, baker, brewer et al to other-interest, that of the buyers and that of those other five (5) groups significantly affected by the seller. This paper explains this key connection. While he did not use these words, it is almost self-evident that he gave us this elegant axiom that connects self-interest and other-interest. Here it is in brief, and it is discussed in more detail below:

Self-interest value maximization is a direct function of optimization of the value provided by every organization to each of that organization's primary stakeholder groups (PSGs) – each relative to the others. 

The “primary stakeholder group” concept is discussed at length below.

 

 Unfortunately and in spite of the powerful advocacy of people like Professors R. Edward Freeman, Klaus Schwab and others in academia, along with business leaders like Larry Fink, Jamie Dimon, John Mackey, the 190 + CEO members of the Business Roundtable in the United States and so many others, Professor Milton Friedman’s profit-as sole-purpose shareholder capitalism model remains the dominant model in free market (private ownership of capital) economies.

 Professor Friedman, of the University of Chicago, proposed this model forcefully in 1970 and it is the way corporations – and really most organizations – have conducted themselves over the last 50 years. As such, it has been and remains the dominant capitalism model. It is grounded in a short-term, inward-focused and win-lose mindset – and it has controlled day-in and day-out business leadership, back office and factory floor conduct over the last 50 years. It has also been an integral part of business school education and, of course, the centerpiece of the financial community part of capitalist economies.

The natural question is straight forward: Why has stakeholder capitalism not caught on? Why has it not become the dominant model through which companies conduct themselves, especially over the time since about 1970?

The Problem in Brief.

The shortest answer is that we have not persuasively explained and compared this existentially transformative alternative model to the simple and easy to understand and narrow shareholder-focused (profit) model.

 And, even where we come close and attract leaders (like the BRT signatories), we have not presented a plain-language explanation of how to “walk the walk” using the stakeholder model

The “Short Termism” Role.

The shareholder profit-focused model largely revolves around the quarterly financial and operating reports companies must provide to the SEC in the United States (other capitalist nations have similar short-termism prompting requirements or protocols). Also a paper and proactively forceful teaching by Professors Michael Jensen and William Meckling in 1976 put the profit as purpose short termism-emphasizing model on steroids, with their principal-agent connection of company leaders to company owners (which they said are the shareholders). Thus, the 15 to 20 times multiple of CEO compensation to entry level (or even average employee level) compensation in the 1970s has become a 250 to 300 times multiple by 2015 or so.

 Even though companies do prepare longer term plans (one, three or five year plans for example), decisions are so often based on the financial market’s view of the very short term quarterlies and one year earnings expectations. This is fairly called a perverse incentive when considering what companies should do to produce best results for all in the medium and longer term. The Friedman model results in mostly short term behavior.

Stakeholder Capitalism Itself Owns Part of the Problem.

For example, virtually every proponent of stakeholder capitalism has advocated their own version – and at a minimum have often used different terminology and different suggestions about what it is and how to act it out – in the corporate suites, back offices and factory floors.

 Even more to the point, details are not provided for how to act out this existentially critical paradigm (model) for daily, weekly, quarterly, three year (even 100 year) plans, conduct and cultural behavior from the boardroom to the boiler room. This letter provides that model with its details. 

 Interestingly over the years, some company leaders say that their companies do consider all stakeholders as they make and sell their products and services – so what’s the beef? For example, it is almost a staple comment in the last paragraph in the Chairperson and CEO letters to shareholders in corporate annual reports to write “our employees are our most valuable asset.” This talk is weak, and a “bad on us” cop-out.

The Tragedy.

One tragic consequence of it all over the years has been underperformance of capitalism since about 1970. To be sure though, this 50 year “opportunity cost” is partially hidden by reasonably significant value and wealth creation flowing from the Friedman model over this period.

 Nevertheless, examples of underperformance are many, including several individual company mistakes like those of Enron, WorldCom, General Electric, Boeing, VW, Takata, etc.

And, the 2007-’08 great recession, a direct product of the shareholder (and the principal-agent perverse incentive) model almost brought the United States - and  global - economies to their knees. These and so many other examples are caused by practicing shareholder capitalism, with its dominantly short term mindset and allowance of bad behavior by leaders and employees. As one indicator, one study estimated the cost of the 2007-’08 great recession in the United States alone at about $2 trillion – some studies suggest a much higher cost.

 For example, one estimate is that the loss was as high as $6 trillion to $14 trillion, a range that approximates 33% to 60% of one year’s output of the United States economy. Other studies are in the same range – enough to say it was in the trillions of dollars for the United States alone – before analyzing the global cost.

The Solution: We Need an Existential and Transformative – Actionable - Model to Get to Stakeholder Capitalism’s Promise and Potential.

The Short Answer Solution.

We should turn to this axiom Professor Adam Smith gave us. He of course used  the language of his time in his two major books 250 years ago to present this  axiom that connects long term self-interest value maximization with other-interest value optimization. He might not have ever considered it to be a precise axiomatic concept, but it is!

 Here it is:

Self-interest value maximization is a direct function of optimization of the value provided by every organization to each of that organization's primary stakeholder groups (PSGs) – each relative to the others. 

Of course, right away we must ask; who are these “primary stakeholder groups” of every organization. The answer is:

The Primary Stakeholder Groups (PSGs) of Every Organization are:

a. Customers, b. Employees, c. Financial Investors, d. Suppliers, e. Communities in which it has a presence and f. Society at large (the general public interest).

Every business, in fact every organization (every group with a unifying purpose), will maximize its own long term value or wealth creation as a direct function of providing optimal value to each of these six (6) primary stakeholder groups. There are not seven (7) PSGs and there are not five (5) PSGs. There are precisely six (6) PSGs for every company – every organization. It is finite, definite and not open-ended.

A little Longer Answer.

The angels are in the details, of course, for this ultimate definition of stakeholder capitalism.

For example, it is essential that we know what each PSG values and what people in their role as buyers in the marketplace value. We also must know why and how the self-interest relationship to other-interest is an axiomatically correct relationship. That explanation follows. In a nutshell, though, the universally treasured inalienable rights of all people, with the core and ubiquitous virtues and traits we all share (around the world) in pursuit of happiness and the full life well lived are best and only satisfied through this relationship. People everywhere, by their nature – the better angels of their nature – will yearn for and embrace this capitalism model – it focuses on them!

The summary of the stakeholder model presented here, including the critically important concept of primary stakeholder groups (PSGs), is supported by and incorporates several pillars of human characteristics, including how people choose to behave in their role as markets for goods and services. These characteristics represent and truly are at the center of the best of human nature around the world.

 

The Supporting Pillars:

These pillars are grounded in the special and wonderful aspects of what can generally be described as the best of human nature in all parts of life – including life acted out in the marketplace between sellers and buyers of goods and services locally and globally. And, capitalism can be the key economic system catalyst that enables all of these characteristics to flourish, through this existentially correct model in action.

 

 The Pillars:

1.       First, of course, are the six (6) primary stakeholder groups of every organization – companies (for profit and non-profit), governments, schools, nations, etc.

2.       The things most valued by each primary stakeholder group of every organization.

3.       The unalienable rights of every person in the world.

4.       The universally (ubiquitously) shared virtues of all people around the world.

5.       The traits (behaviors of people) leading to these virtues.

6.       The better angels of our human nature (all people and peoples around the world).

7.       The gold standard leadership characteristics for all organizations.

8.       The gold standard cultural characteristics for all organizations.

9.       The centrally important role of ethics and ethical behavior for all organizations.

10.     The robust understanding and conduct of fiduciary responsibilities of all organizations.

11.     Happiness.

All stakeholder capitalism models, like the 2019 BRT new purpose statement and the statements and manifestos from Klaus Schwab’s World Economic Forum (WEF) work over these 50 years will only be actionable through these pillars – otherwise as said by some, it would all indeed be mostly just anodyne rhetoric!

 

Again, the Angels are in the Details.

Importantly, there are details for each pillar – all very kitchen table understandable, but even the details need some further explanation to enable an organization to fully live them.

So, there will remain more to explain. After all, a written explanation of the “existentially transformative” model for getting capitalism right should not fit on the back of a pack of matches!

 

The Next Steps.

This article asserts the following:

1.     PSG Stakeholder Capitalism will result in the highest long term wealth and value creation for societal well-being – for companies, for local and global societies and economies and for all people everywhere. Both explicitly explained here and readily deduced where not explicitly explained, the why question is answered here.

 

2.     The explicit answer to the how question is presented in some detail in this narrative. Further detail is readily available for the interested reader.

 

 

3.     The answer to the what question (what economic system - shareholder capitalism, stakeholder capitalism or some other system (others have shown that capitalism of either form is superior to all other economic systems)) – is now self-evidently clear.

 

4.     PSG Stakeholder Capitalism is the ultimately best system for all organizations, nations, local and global economies and all people everywhere!

 

 

Front of Mind Focus on All Six (6) PSGs – The Organizational Imperative!

A Few Final Thoughts:

1.     This existentially transformative change in organizational culture and behavior is necessary to finally gets capitalism right: modeling the best of people in their various roles in economies.

2.     The cultural changes and leadership changes in companies must go from the boardroom to the boiler room.

3.     Co-equal front-of-mind focus on each of the six (6) PSGs is essential to A. Maximize long term wealth and value creation for the enterprise, B. Provide optimal long term value for each PSG and C. Best contribute to maximization of local and global societal well-being.

In fact, the Front of Mind Focus on All Six (6) PSGs is at the heart of putting into action what we all should know and what Adam Smith said forcefully in his own words. It is capitalism’s Organizational Imperative!

When PSG Stakeholder Capitalism is universally adopted and acted out, the ultimately equitable and highest long term wealth and value creation economic system will be in place.

Always as an implicit complementary result, all national governance systems will be drawn to move toward adopting the underlying axiom that the moral philosopher gave us for economies 250 years ago – an ultimately beneficial outcome for all people and peoples everywhere!

Getting Capitalism And Democracy Right - A Mindset and Life View Matter: Smith Had It Right, Friedman's Explicit Teaching, as Applied for 50 Years, Did Not, and President Trump Certainly Does Not!

First, The Tragic Corona Virus Pandemic, and the Trump Failing.

With its global reach and overwhelming harm to people everywhere, does the pandemic tell us anything about this mindset and life view question? Yes, it does.

Using one of Disneyland’s most famous rides as a guide, “It’s A Small World After All,” it reminds all of us that we do share this one planet. This one joyful Disneyland ride reminds us that we do have some extremely important shared interests, some unifying common bonds. So, it suggests pleasantly and clearly that there is a reason for us to have life views and mindsets that reflect things that unite us rather than things that divide us.

The pandemic would have been much better dealt with from the start, in the United States and worldwide, if all nations and international organizations had been working together – grounded in this unifying long term life view and mindset.

The handling of the pandemic, nation by nation, and even state by state in America, has been sadly uncoordinated, with the Trump administration being one tragic example of getting things wrong from the start. The Trump failing is clearly visible through the delayed action and the subsequent (and ongoing) bumbling on specific items – like the irresponsibly delayed testing availability and provision, the inexcusable failure to get  supplies and protection to all health care providers and all essential workers in a timely fashion and lack of national coordination of health care systems and associated needs. 

And, most recently (mid-April), the unthinkably divisive posture he has taken toward the governors of the states on testing and on who decides about when and how to ease restrictions is another irresponsible decision on his part.

In fact this bumbling is not surprising given that the Donald Trump life view is antithetical to a unifying life view and unifying behavior, so his leadership is certainly in question on this ominous matter – and on his entire presidency!

Now, Mindsets, Life Views, Professors Smith and Friedman – The Lessons We Must Learn!

Democracy and Capitalism, when both are done right, enable societies to reach their highest long term value, wealth and full life well-lived potential.

Professor Adam Smith, the father of modern economics by virtually all accounts, wrote in 1776 about the way butchers, brewers and bakers should be able to make and sell their products and how people in the marketplace should buy them – or not. Smith’s teaching 250 years ago supports and even screams out for the life view and long term mindset presented in this narrative – the way to get capitalism right that follows his teaching.

Professor Milton Friedman, a disciple of Smith and a Nobel prize-winning economist from the University of Chicago wrote his doctrine in 1970 for how to get capitalism right. He wrote, in the New York Times Magazine in September, 1970 – and taught through 2005 - that "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." This is his mindset or life view of the purpose of companies in a free market economy.

Friedman’s profit-as-sole-purpose model for leaders of corporations has been dominant in free enterprise capitalist economies ever since. It has been taught in business schools and used as the singularly important performance measure for companies and their top management for the last 50 years. Much value and wealth has been created over this time period. However, it is sub-optimal as a model and some serious leadership mistakes have also flowed from (largely) perverse applications of this model. Yet, it remains dominant.

What Is The Difference And Why Does It Matter?

The difference lies in the mindset or life view choice leaders make.

The short description of the difference between these two critically important mindsets (life views) is:

1.     The Friedman shareholder (profit-as-purpose) mindset is short term, inward-focused and win-lose.

2.     The Smith stakeholder (primary stakeholder groups) mindset is long term, outward-focused and value-optimizing for each of the six (6) primary stakeholder groups of every corporation – every company or organization.

This difference matters because one of the outcomes, if not the uniquely important long term outcome, of every corporation (company, organization for profit or non-profit, publicly or privately held, etc.) is the long term maximization of its own value or wealth creation.

The ironic reality is that the road to maximization of a company’s long term value (wealth creation) goes through its focus on and optimization of the long term value it provides to each of its six (6) primary stakeholder groups!

Professor Friedman would almost certainly have explained this model this way 50 years ago if he had not considered it an automatic result (“the invisible hand”) of each company in an economy focusing narrowly on making profits from its product or service.

Professor Smith articulated it explicitly and  pointedly in his teaching 250 years ago.

So, Getting Capitalism and Democracy Right.

In August, 2019, a group of CEOs from some of America’s leading companies, through their association, the Business Roundtable (BRT), signed a new purpose statement for corporations. The BRT is an association of CEOs from several large American companies. Collectively, their companies have more than 15 million employees and $7 trillion in annual revenues – having businesses in every state in the United States.

BRT effectively endorsed the broad stakeholder mindset and model as the purpose of corporations on August 19, 2019. This decision moved away from (replaced) their long held shareholder purpose – which they had adopted formally in about 1997, and which was passionately presented and urged on capitalist (free market) economies by Professor Friedman in 1970. Again, this model has been dominant for the last 50 years.

A Bit More About The Shareholder-Focused Mindset.

This long held idea that it is by focusing on profit day in and day out that companies will achieve this outcome (long term value maximization for the company itself) is simply wrong!

A correct understanding of Professor Milton Friedman’s teaching, it must be said, is that he argued that when management has a singular focus on profit as it does its work, all those affected by its work, throughout the economy – especially its own employees, communities, suppliers and the general public interest will be best served as though by the guidance of an invisible hand - with all companies behaving in the same way. His motives and expectations for societal well-being were fine.

There is no mystery here. This model in action argues that, with this behavior and action template in use by all participants in a free market, all participants including all people will be best off. He therefore implicitly argued that the effects (outcomes) for what we call the “primary stakeholder groups” of one company and all companies would be as good as they could possibly be. This model, though, had the mindset and life view, the “focus criterion” precisely backwards!

This shareholder and (short term) profit focus that the Friedman doctrine calls for relies on the notion of this “invisible hand” that would automatically guide the company and collective result for societies and economies to this highest wealth and value level over the long term. Again, for the last 50 years this doctrine has been literally dominant in business education curricula and in corporations.

It has indeed resulted in value creation. It has also required the leaders of companies to behave in accordance with this dominant short term mindset, partly but not solely driven  by tying top management compensation to share price or market capitalization, etc. – measures only of shareholder well-being.

That is, one of the flaws of this model is that it asks – even requires – managers to behave in short term, inward or self-focused ways. This flaw alone is disqualifying.

One result has been companies making big value destroying mistakes (Enron, WorldCom, Adelphia, VW, GE, GM, etc.). Another result of this mindset is the 2007-’08 great recession, which is directly attributable to the behavior this mindset induces. The reality is that, as special as Professor Friedman's teaching is, the 'invisible hand" effect is not automatic. The teachings of Adam Smith were more explicit, as we will see, but without being front-of-mind focused, even his teachings have not been fully followed.

A Bit More About The Primary Stakeholder Group-Focused Mindset.

The primary stakeholder group mindset, on the other hand, asserts that a company that focuses on optimizing the value it provides to each of its primary stakeholder groups will produce as one outcome the maximum long term company wealth and value creation – precisely because of this serving, outward focus. That is, the ironic outcome for a company, by focusing on optimization of the value it provides to each of its primary stakeholder groups – each relative to the others - will be long term maximization of the wealth creation (value) of the company itself!

Here is the same idea expressed as a formula:

IVM= f (S₁VO, S₂VO, …S_NVO).

That is, a business (and a person) will maximize its own long-term value when it devotes its time, talent and treasure (its focus) on optimizing the value it provides to each of its primary stakeholder groups.

The Primary Stakeholder Groups of any organization are: a. Customers, b. Employees, c. Financial Investors, d. Suppliers, e. Communities in which it has a presence and f. Society at large (the general public interest). 

Professor Adam Smith, a moral philosopher by education, used his own words to express this mindset several times in his two books. Here are some of his own ways of saying the same thing:

1. “The property which every man has is his own labour; as it is the original foundation of all other property, so it is the most sacred and inviolable…To hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor is a plain violation of this most sacred property.”
   
   
2. “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."
   
   
3. “Man was made for action, and to promote by the exertion of his faculties such changes in the external circumstances both of himself and others, as may seem most favourable to the happiness of all.”
   
   
4. ‘He is certainly not a good citizen who does not wish to promote, by every means of his power, the welfare of the whole society of his fellow citizens.”

It is as clear as can be that he connected focus on others with focus on self. He gave us an axiom that connects self-interest and other-interest.

Therefore, the way for a company in a free market capitalist economy to maximize its own long term value and wealth creation is to optimize the long term value it provides to each of its primary stakeholder groups.
 It is here, though, that even followers of Adam Smith, including Professor Friedman, did not fully explain the front-of-mind necessity that must exist for the "invisible hand" concept to work. 
And importantly, Professor Smith almost certainly did not (and probably could not) anticipate that the six primary stakeholder group reality would exist in the way we now understand it in the 21st century.
 We do. The BRT new purpose statement does. Some other students of getting capitalism truly right do.
This explicitly front of mind focus is essential now. We stand of course on the shoulders of many, but especially those of Adam Smith and, more recently, Milton Friedman. We, though, now know that companies, leaders and free market economies must be explicitly committed to the broader primary stakeholder group-focused life view and mindset in order for capitalism to be the economic catalyst for society that it can and must be. 
 No new sentence!

What About President Trump And His Mindset, His Presidency’s Performance In The Context of This Discussion of Capitalism and Democracy?

This article until now has been primarily discussing Capitalism (and indirectly Democracy) done right and wrong, and has looked at life views – mindsets – to make the case.

The same concepts, the same criteria for achieving long term societal well-being, apply to sovereign nations – Democracies and all governance forms.

In a nutshell, Donald Trump has brought the short term, inward-focused and win-lose (us against them) mindset to the White House, and he personifies all that is fatally flawed about this mindset. It applies as fully – and more so – to the larger public interest stewardship that government leaders are entrusted with as it does to corporations in a capitalism-done-right free market economy.

With other autocratic leaders around the world, he is failing. He is failing with a flourish. Others are failing in other ways – but all the failures are tied to this short term mindset!

President Donald Trump is the quintessential failure as a “leader” in the private sector and even more robustly he has failed as a “leader” in the public sector!

Why? Because he personifies all the value destruction potential, the sub-optimal potential that the short term mindset brings to the nation and world – in an absolute sense and when compared to the value creation potential the long term, outward-focused and primary stakeholder group-focused mindset –life view – can bring to the nation and world!

His presidency has displayed this failing from day one. Each day of his presidency, helped by the win-lose philosophy and conduct of his close advisers, most of whom are themselves absolutely flawed as public servants, has been a seminar on selfishness. But, it has not been quite so fully on display until the corona virus hit the people of the planet. His mistakes, including unforgivable delays in decision-making and attempts to cover his mistakes up by lying, are unassailable proof of his incapacity to handle the job.

A Final Thought.

The Smith stakeholder (primary stakeholder groups) mindset is presented in the context of free market economies and one model for the way companies can approach their existence.

This mindset, as a more general matter, is a golden rule-connected model for behavior of people, companies, governments – all human groups and interactions.

To be long term, outward-focused and value-optimizing for each group of people we significantly affect over time, as individuals and in our own groups, is to be living our lives based on a servant-based leadership life view. And, happily, it is the catalyst that allows all nations, people and peoples to get on their highest long term value trajectory and stay there. 

It connects Democracy, free market Capitalism and the better angels of human nature in the best way possible!

Corporate Purpose and Commitment. Is It Really a Choice Between Shareholders and Stakeholders? It Is Not: It Is The Quintessential Both-And Proposition.

Summary of this Article.

This comment on the Business Roundtable (BRT) announcement on August 19^th adopting a new purpose statement for corporations comes a little late – by more than four months after BRT’s announcement. This subject of stakeholder purpose or shareholder purpose for corporations, though, has been continuously discussed and debated since the 1970s.

It is offered to make the case that the shareholder purpose, or profit-as-purpose, model for corporations is absolutely the wrong model. It also is offered to strongly make a case that the broad primary stakeholder group model is the correct model for corporate purpose and commitment.

 The shareholder profit-as-purpose model has been the dominant and narrow, primary focus of corporations since Professor Milton Friedman presented it ably and forcefully in the 1970s – especially in his article in the New York Times magazine issue of September, 1970. For the most part, the literature and discussions on this purpose subject since then has pitted the stakeholder proposed model against the profit model. Books have been written, lectures given and debates held. Through it all, and in spite of well-presented arguments supporting the broader model, the profit model has not only remained dominant, it has become almost an axiom for publicly held corporations – and private companies as well.

However, it is the wrong purpose, if maximizing long term profit and value creation of the corporation is in fact one of or the main outcome corporations seek to produce.

 BRT’s August 19th announcement moved away from the profit-as-purpose model to a shared purpose and commitment to all primary stakeholder groups of a corporation – customers, employees, suppliers, communities in which they work and long term value for shareholders. This commitment was adopted, BRT said, to “deliver value to all of these stakeholder groups – for the success of our companies, our communities and our country.”

The reactions to the BRT announcement ranged from 1. Support to 2. Skepticism that it might be merely a public relations or political strategy in an election cycle to 3. Rejection. Several journalists and academics weighed in, generally along this range.

It is time for the debate about corporate purpose or the shared fundamental commitment of all corporations in a free enterprise capitalist economy to end. There should never have been a debate in the first place!

BRT and its spokesperson, Jamie Dimon, the current BRT chairman and chair of JP Morgan Chase, should be commended for, at a minimum, having good intentions. There probably was good discussion before the 181 CEOs signed the new corporate purpose statement – probably some healthy debate.

Embracing the concept, though, is only valuable to economies and societies if the full breadth and depth necessary to breathe everyday life into it in practice happens.

Let’s look at both models and see whether and how they are related. If they are related, we might see if there is a best way to move forward, a solution to this nagging, irritating and counter-productive longstanding debate.

Professor Milton Friedman and Profit as the Sole Purpose.

The dogmatic proclamation by Professor Friedman in the 1960s and 1970s - the September, 1970 New York Times magazine article in particular - set the U.S. economy (and other capitalist free enterprise economies) on a 50 year and counting profit-as-purpose path. This model is wrong for two reasons:

1.     The first reason is that a narrow and dominant focus on profit is doomed to fall short of maximizing long term profits (value creation) as an outcome for the corporation – precisely because it is so myopic. To almost always be looking at and even be fixated on the scoreboard without paying attention to all the important things that must be done correctly to produce great scoreboard results as an outcome is self-evidently a flawed model.

2.     The second is the failure to understand that a robust, sage and correct understanding of how to produce maximum long term profit or value creation for the enterprise itself as an outcome requires a corporate commitment to and focus on optimization of the long term value it provides to each of its six (6) primary stakeholder groups. These are essentially those listed by BRT. They are: Customers, Employees, Suppliers, Communities where it has a presence, Financial Investors (Shareholders) and The General Public Interest.

The Broader Stakeholder Purpose and Commitment.

These are summary thoughts about how corporations can best breathe full life into this one ultimately correct corporate purpose or commitment.  A full presentation of the pillars supporting this summary is included in the narrative following this summary statement.

To continue to debate which is best, shareholder or stakeholder purpose, is a tragic waste of time. In fact, the last 50 years of narrow focus on profit as the sole purpose has led to sub-optimal economic performance, including being the primary cause of the 2007-’08 great recession. If and only if the broader stakeholder purpose and commitment is adopted and lived by corporations will long term profit and value creation maximization for the corporation itself – and for economies - be a natural outcome.

Shareholder profit maximization, as championed by Professor Friedman and as placed on steroids by Professors Michael Jensen and William Meckling in 1976, only flows, and flows as an outcome not a reason for existence or purpose, from primary stakeholder group value optimization in the long run. It is a functional relationship and a both-and proposition.

In terms of mindsets, the shareholder mindset is dominantly short term, inward-focused and win-lose. The stakeholder mindset is dominantly long term, outward-focused and value-optimizing for the six (6) primary stakeholder groups. As an important aside, this same “stakeholder mindset” is also completely applicable to governments in democracies, especially including representative democracies.

That is, long term shareholder profits (value creation), and corporate or entity  value, are maximized if and only if the long term value the corporation provides to each of its six (6) primary stakeholder groups is optimized. The former is a direct function (result) of the latter!

The Article.

Long Term Profit Maximization (Value Creation) for a Corporation Is a Function of Optimizing Long Term Value for Each of the Corporation’s Six (6) Primary Stakeholder Groups. The Former is a Direct Function of the Latter!

The Business Roundtable (BRT), an ”association of CEOs of America’s leading companies working to promote a thriving U.S. economy and expanded opportunity for all Americans through sound public policy,” announced in late August, 2019 its adoption of a new statement of purpose for corporations. In short, BRT has embraced the broad stakeholder purpose concept and moved away from the narrow shareholder model of the purpose for corporations.

The Stakeholder Model.

From BRT’s news announcement on August 19^th, “The Business Roundtable has   changed its statement of “the purpose of a corporation.” No longer should decisions be based solely on whether they will yield higher profits for shareholders, the group said. Rather, corporate leaders should take into account “all stakeholders”—that is, “employees, customers and society writ large.” The release provided more detail about each of the stakeholder groups but this statement is the heart of the broader purpose they adopted.

The Shareholder Model.

 The shareholder model holds that the purpose of a corporation is solely to produce profit for corporate shareholders. Its origin is the teaching of Professor Milton Friedman of the University of Chicago in the 1960s and 1970s. It was placed on steroids in a 1976 article by Professors Michael Jensen and William Meckling who asserted that managers are agents of the shareholders, who they said were the “owners” of the corporation. This agency theory, with its own flaws, including this ownership matter, led to the practice of tying the compensation of the top managers of corporations to the share price and related value measures of the corporation, adding to the narrow focus on value creation for shareholders over the last 50 years. For one thing, it has been a major cause of the multiple of CEO compensation compared to entry level employee compensation going from about 20 to 30 times in the late 1970s to as much as 300 times by 2015, and through the present time. 

Reactions to the BRT Announcement.

Since the BRT announcement, several articles and other commentary from academics, reporters and corporate leaders have been written. The comments   range from endorsement of the BRT decision to cautious support but skepticism about whether it is just happy talk that might not lead to behavioral changes in corporations (not walking the walk), to outright rejection of the stakeholder model. This latter argument is simply and bluntly that attention to other stakeholder groups like employees, suppliers and communities is fine, but shareholders are still and always going to be first among equals – King!

The Answer.

In a nutshell, when capitalism is done as we present it here and when corporate purpose is conceptually defined as we define it here, and as the BRT has now chosen to define it, then the reason to debate the merits of these two models will no longer exist.

Why Not?

Because this debate, this pitting of shareholder interests - one of every corporation’s six (6) primary stakeholder groups - against the interests of each of its other five (5) primary stakeholder groups is counter-productive, even self-defeating. The debate has been about a choice that need not exist. It is a both-and proposition, not a choice!

Public companies and all organizations that focus on optimizing long term value for each of their six primary stakeholder groups will, as a natural outcome, maximize the long term value creation, including profit and all value measures, of the organization itself! Professor Friedman et al simply did not think it all through deeply enough.

They did not take into account the better angel dominant characteristics of people as people – including people as markets in the marketplace locally and globally. If the dominant capitalism model and corporate purpose model over the last 50 years or so had been the one we present here, that BRT has now supported in concept but not yet in action, the world would be a better place – ultimately better.

An Existential and Transformative Change.

It is an existential change to corporate purpose and to getting capitalism right that the BRT support for the broader stakeholder concept fortuitously prompts us all to consider and adopt. And, not just conceptually as BRT has so far done, but as a change that is behavioral, actionable, teachable and learnable. This is an opportunity to make an ultimate existential improvement for economies and societies. It also helps get capitalism right.

Its explanation and details follow here below. To repeat and be forcefully clear, the opportunity to get corporate purpose right and get capitalism right is really what the BRT and its signing CEOs have teed up for all of us. It will take effort. Embracing the concept, talking the talk, is only a first step.

 This article presents one deeply held belief about how to do it – a belief that is grounded in part on the real core teaching that the moral philosopher and father of modern Economics, Professor Adam Smith, intended or should have intended!

Professor Adam Smith’s most relevant statements on this core subject are presented here first, followed by a complete explanation of the broad corporate purpose - the stakeholder-based purpose - that the BRT recently adopted in concept.

 The primary stakeholder group value optimization model is presented below in its full detail, following our quotes from Adam Smith. These quotes were dogmatically expressed by him – he meant them!

His heart and mind are at one in these statements. His Moral Philosopher self and his “Father of Modern Economics” self are at one as well. They are:

1.   “The property which every man has is his own labour; as it is the original foundation of all other property, so it is the most sacred and inviolable…To hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor is a plain violation of this most sacred property.”

2.  “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.”

3.   “Man was made for action, and to promote by the exertion of his faculties such changes in the external circumstances both of himself and others, as may seem most favourable to the happiness of all.”

4.    ‘He is certainly not a good citizen who does not wish to promote, by every means of his power, the welfare of the whole society of his fellow citizens.”

It is as clear as can be that he connected focus on others with focus on self. He gave us an axiom that connects self-interest and other-interest.

The Proposed Stakeholder Group Model for Corporate Purpose and Capitalism.

This is the complete way to express the concept BRT endorsed. Endorsing the concept is one thing. Breathing everyday life into it in corporations and entire economies is another. We present the way we think it should be done here:

I. The Proposed New Model – The Essential Mindset for Corporate Purpose and  Capitalism Going Forward:

Self-interest value maximization is a direct function of optimization of the value provided by an organization to each of that organization's primary stakeholder groups – each relative to the others. This is the complete way to express the concept BRT endorsed.

Here is the same idea expressed as a formula:

IVM= f (S1VO, S2VO, …SNVO), where N=6.

That is, a business (and a person) will maximize its own long-term value when it devotes its time, talent and treasure to optimizing the value it provides to each of its six (6) primary stakeholder groups.

II. The Primary Stakeholder Groups of Any Organization (or Person) are:

a. Customers, b. Employees, c. Financial Investors, d. Suppliers, e. Communities in which it has a presence and f. Society at large (the general public interest).

Every business, in fact every organization (every group with a unifying purpose), will maximize its own long term value or wealth creation as a direct function of optimally serving its six (6) primary stakeholder groups.

The concise model presented above, including the critically important concept of primary stakeholder groups, is supported by and incorporates several pillars of human characteristics, including how people choose to behave as markets for goods and services. These characteristics represent and truly are at the center of the best of human nature around the world. The BRT new purpose statement will be actionable through these pillars – otherwise as said by some, it would all indeed be mostly just anodyne rhetoric!

Importantly, the details of each pillar follow the list below, and even the details need further elaboration to enable an organization to fully live them.

They are grounded in the special and wonderful aspects of what can generally be described as the best of human nature in all parts of life – including life acted out in the marketplace between sellers and buyers of goods and services, locally and globally. And, capitalism is the key economic system catalyst that enables all of these characteristics to flourish, through this model in action.

III. The Supporting Pillars:

1.       First, of course, are the six (6) primary stakeholder groups of every organization – companies (for profit and non-profit), governments, schools, nations, etc.

2.       The things most valued by each primary stakeholder group of every organization.

3.       The unalienable rights of every person in the world.

4.       The universally (ubiquitously) shared virtues of all people around the world.

5.       The traits (behaviors of people) leading to these virtues.

6.       The better angels of our human nature (all people and peoples around the world).

7.       The gold standard leadership characteristics for all organizations.

8.       The gold standard cultural characteristics for all organizations.

9.       The centrally important role of ethics and ethical behavior for all organizations.

10.     The robust understanding and conduct of fiduciary responsibilities of all organizations.

11.     Happiness.

Here Are The Important Details of Each Pillar.

These details really represent the essence of the highest nature of people around the world, interacting with each other in all ways and, especially here, in their role as sellers and buyers in the marketplace. The BRT new purpose concept gets legs through these pillars and the details for each pillar:

A. The Primary Stakeholder Groups of Any Organization:

1.       Customers 2. Employees, 3. Suppliers, 4. Financial Investors, 5. Communities where the organization has a presence, and 6. The General Public Interest.

B.  The things most valued by each primary stakeholder group of every organization. The things listed here for each group are indicative, not exhaustive, and could be amended. At the same time the valued things listed her are certainly among the core and finite list of things each stakeholder group values:

1.       Customers: 1. High quality, 2. Reasonable prices, 3. Kindness, 4. Companies that treat their employees well and 5. Companies that are good citizens.

2.       Employees: 1. Opportunity, 2. Fair compensation, 3. Security, 4. Opportunity and Challenge to achieve as individuals and teams/groups and 5. Company conducts itself as a good neighbor, a good citizen.

3.       Investors: 1. Best value creation from their funds, for any period but especially over the long term, 2. Positive company participation in communities, 3. Great company treatment of employees, 4. Great company standing in society (loved), 5. Gold standard leadership in the company and 6. Full participation in society.

4.       Communities in which it has a presence: 1. Good citizen in local communities, 2. Long term participative partner in community well-being, 3. Great company treatment of its employees, 4. Full company involvement in environmental and societal stewardship for the long term and 5. Openness.

5.       Suppliers: 1. Fair dealing, 2. Long term partnership opportunity mutually earned, 3. Great treatment of employees, 4. Positive citizenship conduct of company and 5. Enjoyable to work with.

6.       Society (The General Public Interest): 1. Great local and global citizen, participative and engaged, 2. Great social and environmental steward, long term, 3. Willing partner and participant with others (including governments) in serving the public interest and 4. Excellent treatment of its employees, suppliers and neighbors.

C.  The Unalienable Rights: The basic unalienable rights of people around the world are treasured:

1. Life, 2. Liberty, 3. The Pursuit of Happiness and 4. Property (especially that property that is one’s own aptitudes, about which one is passionate).

 Note: These four rights also incorporate health care and education as universal and unalienable.

D.  The Globally Held Virtues: Those virtues (and the traits associated with having each virtue) that are shared as precious by virtually all peoples around the world:

1. Wisdom and Knowledge (Curiosity, Love of Learning, Judgment, Ingenuity, Social Intelligence and Perspective), 2. Courage (Valor, Perseverance and Integrity), 3. Humanity and Love (Kindness and Loving), 4. Justice (Citizenship, Fairness and Leadership), 5. Temperance (Self-control, Prudence and Humility), 6. Transcendence (Appreciation of Beauty, Gratitude, Hope, Spirituality, Forgiveness, Humor, and Zest).

E.  The Gold Standard Leadership Characteristics:

1. Establish direction – Vision, 2. Personal humility and professional will – modest and fearless, 3. Inclusive, enabling, inspirational, a listener, 4. Stakeholder-focused – in a maniacally profound way, 5. Heart of a servant, 6. Ethical, courageous and just and 7. Fun.

F. The Gold Standard Cultural Characteristics:

1. Adaptive, with a core ideology (purpose and values), 2. Risk taking, trusting and proactive, 3. One in which all are heard and the truth is heard, 4. Reflective, humble, anticipatory and involved, 5. Rational and respectful, A conscientious mindset, 6. Quietly confident, unassuming while pursuing the organization’s vision and mission with passion, perseverance, humor and zest, 7. Disciplined people, thoughts and actions in a fun and dynamic environment, 8. Open, supportive and enthusiastic, 9 Happy in a stakeholder-centered (H3) way and 10. Fun.

G.  Three Essential Elements of Correct Organizational Behavior at All Times:

1. Ethical behavior in all things, 2. A robust understanding of fiduciary responsibility and 3. Happiness.

H.  People As Markets: “Markets” here is a synonym for “people.” It presents the optimization idea in street language, as follows:

1. Markets like companies that have and live the globally held virtues, 2. Markets like companies that treasure and honor the unalienable rights, 3. Markets like companies that fully understand they have fiduciary obligations to all their primary stakeholders, 4. Markets like companies that are ethical and fair, 5. Markets like companies that are effective, efficient, productive, creative and innovative (the basic blocking and tackling requirements of every excellent organization), 6. Markets like companies that produce high quality products and services at reasonable prices, 7. Markets like companies that are good citizens, pitching in and helping out in their communities, 8. Markets like companies that treasure the environment and are good stewards for future generations, attending to the public interest and 9. Markets like companies that compensate their employees fairly and create great, stimulating work environments for them – helping them be creative, innovative, challenged and fulfilled.

I.  The Better Angels of our Human Nature:

What are the better angels of our human nature?

A.    President Lincoln suggested these are: 1. Humaneness, 2. Compassion, 3. Good will, 4. Tolerance and 5. Other good things.

B.    Harvard Professor Steven Pinker examined four motives that "can orient [humans] away from violence and towards cooperation and altruism." He identifies:

1. Empathy: which "prompts us to feel the pain of others and to align their interests with our own," 2. Self-Control: which "allows us to anticipate the consequences of acting on our impulses and to inhibit them accordingly," 3. The Moral Sense: which "sanctifies a set of norms and taboos that govern the interactions among people in a culture." These sometimes decrease violence but can also increase it "when the norms are tribal, authoritarian, or puritanical" and 4. Reason: which "allows us to extract ourselves from our parochial vantage points.”

J.  Relevant Quotes From Iconic Leaders Over The Centuries: Each of These Quotes Supports the Broad Primary Stakeholder Group Purpose in Concept and Action.

1. All wrong-doing arises because of mind. If mind is transformed can wrong-doing remain? Buddha.

 2. A man is but the product of his thoughts - what he thinks, he becomes.          Mohandas Gandhi.

3. I want you to be concerned about your next door neighbor. Do you know your next door neighbor? Mother Teresa.

4. It is very important to generate a good attitude, a good heart, as much as possible. From this, happiness in both the short term and the long term for both yourself and others will come. The purpose of our lives is to be happy. The Dalai Lama.

5. “Do to others whatever you would like them to do to you. This is the essence of all that is taught in the law and the prophets. (Matthew 7:12).

6. Life's most urgent question is: what are you doing for others? Martin Luther King, Jr.

 7. “Every good act is charity. A man's true wealth hereafter is the good that he does in this world to his fellows.” Mohammed.

8. Forbes Thought of the Day – 10/21/’13. “A man's true wealth is the good he does in this world.”

9. Every art and every inquiry, and similarly every action and choice, is thought to aim at some good; and for this reason the good has rightly been declared to be that at which all things aim. Aristotle.

IV. Adaptive Strategic Planning (Organic, Changing but Grounded, etc.).

So, the day to day conduct of the work of a corporation, and every organization, must be grounded in the new purpose and the pillars supporting it.

It also must be accompanied by a disciplined but not stifling near and long term planning process – tactical, strategic and adaptive.

A Brief Explanation of the Role of Multi-Year Planning and Doing, The Main Action Vehicle For Our Model, is in order.

Strategic plans are often spoken of in a negative way. The criticisms include being too slow, irrelevant before the ink is dry on the document, esoteric and a waste of time. They are characterized as being (and often are) placed on a shelf collecting dust. It has also been said that “plans are worthless but planning is essential.”

The truth is quite the contrary. Plans and adaptive planning go hand in glove. In fact, actionable multi-year adaptive, adaptable plans, or playbooks, are the essential vehicle through which this new mindset-based purpose happens. The actionable plan is the dynamic vehicle through which it all springs to life – and continues to be vibrant. Again, let’s be clear: An adaptable, adaptive plan is the very definition of planning, which in turn keeps us on the maximum value creation trajectory over time, and it fulfills, it is fun.

To be more pointed: The SEC quarterly reports by corporations in the United States are primarily focused on the financial condition of a company (the investor primary stakeholder group).

The SEC reports in the U.S. – and corresponding reports in other nations - and all regular reviews of company financial health must be complemented by regular reporting and discussion, such as quarterly reports, on progress toward goals for each of the other primary stakeholder groups as well. That is how optimal value improvement can be obtained for each primary stakeholder group – and long term value maximized for the organization.

In addition, daily, weekly, monthly and all leadership focus behavior should consider the effects of decision choices on each of the six (6) primary stakeholder groups, so that the optimization of value criterion is front of mind always. It can sound burdensome but as it becomes second nature it is both invigorating and liberating – it leads to long term corporate value maximization as an outcome precisely because the dominant focus is correct – primary stakeholder group value optimization!

A Final Thought on This Existential Change - and Ultimate Improvement – To Corporate Purpose and Capitalism Done Right.

All too often over the years, the easy way out is to do pretty good - to beat the competition. Excellence is therefore too often not pursued. Of course breakthrough innovations have been made and do happen, but so often they have preceded organizational behavior and have flowed from the passion of true innovators before the fact.  

The great news here is that the full life well-lived – the happy life - and the highest value creation for each and all corporations (all organizations) will flow from, and only from, adopting and acting out this timely broader corporate purpose that the BRT has adopted in concept and, of equal importance, this integrally related and deeper appreciation and adoption of capitalism done right!

A Perennial Debate?

The decades long debate about whether shareholder value or stakeholder value is the proper purpose or commitment of corporations is in fact a debate that should end. It should never have been necessary.

Shareholder value and, more generally, corporate long term profits - value creation - is maximized if and only if the corporation focuses on and delivers optimal long term value to each of its six (6) primary stakeholder groups.

Capitalism as the best catalyst to enable corporations to act this purpose and commitment out is itself done right if and only if it is perfectly in harmony with and thus facilitates this model.

The essential next step is to breathe behavioral, actionable, teaching and learning aspects of what Adam Smith really intended when he wrote and taught about societies and economies 250 years ago.

A Final Thought.

The BRT initiative is timely and commendable. It prompts this elaboration on the perennial question of what the best purpose and commitment of corporations, indeed all organizations, really should be – the purpose that will enable corporations to maximize their own long term value (wealth, profit) creation as an outcome.

This elaboration makes the case that it is if and only if corporations focus on optimizing the long term value they each provide to their six (6) primary stakeholder groups will the corporation’s own long term value (wealth, profit) outcome be maximized. The model requires focus on serving these groups, not on fixating on the scoreboard – the corporation’s own profit near and long term.

Fortuitously, serendipitously or perhaps ironically it is this model that does what Professor Milton Friedman, economist, wanted as an outcome. It also is the model that Professor Adam Smith, moral philosopher and economist, taught and advocated. It enables capitalism, as a catalyst, to bring the highest long term well-being to all societies using it – all people and peoples everywhere!